Debt has the power to
significantly impact your credit score. The amount of debt you have will either
help you or hurt you in your attempts to borrow money, pay a reduced rate for
insurance, or enjoy lower interest rates. This debt is likely the biggest factor
that goes into determining your credit score.
While an individual’s debt only accounts for 30% of their credit score, this
calculation also considers one’s credit utilization. This is the ratio of an
individual’s credit limit and their credit card balance for every credit card
they own. The higher an individual’s’ credit card balance in relation to their
credit limits, the more of a negative impact this will have on their credit
score. With this in mind, over-the-limit and maxed out credit card balances
tend to hurt most of all.
Additionally, when reviewing your credit score, you must understand that this
number also considers the proximity of your loan balance to your original loan
amount. Thus, working to pay down your loan balance will improve your credit
score. An individual that is carrying high credit card debt will find that this
significantly affects their credit score. Even with a low debt-to-income ratio,
this level of debt can hurt one’s credit score.
Handling Debt to Improve Credit
An Individual can make a positive impact on their credit score by proactively handling their debt. By paying off balances quickly, this will help you raise your credit score as this will lower your credit utilization. If the debt is too overwhelming, the credit score will reflect this by falling. To illustrate, missed payments will cause your credit score to drop immediately.
The experts at Truman Advisors warn that choosing to go the route of bankruptcy or debt settlement can also damage your credit score which may take months or years to rebuild. Debt consolidation and credit counseling don’t affect the credit score directly, but debt consolidation may impact your credit by exchanging longstanding credits with a single newer debt. Age of credit makes up 15% of the credit score.
Though consolidation and other debt solutions may hurt your credit in the short term, they shouldn’t be discounted. These solutions for handling your debt still help to improve your credit score over time.
Understanding Credit Scoring
Many peoples are under the impression that they need to carry a certain credit
card balance in order to boost their credit score, but this isn’t true. As an
overly high credit card balance can hurt one’s credit score, this method of
thinking can quickly wreak havoc on one’s credit score. Instead of carrying a
high balance, use a credit card for certain payments and pay off your balance
in full every month—this will build good credit while avoiding going into
debt.
10% of your score is influenced by the type of debt that you have, which includes loans and credit card
accounts. While it is helpful to have experience with both types of accounts,
it is important that these monthly installments are made in full every month.
Truman Advisors share with their clients to never take out a loan with the sole
intention of boosting their credit score. When building your credit, borrow
money only when you need it.
Your debt plays a major role in your financial health. Maintaining a positive
credit score means staying on top of your debt and working to pay off these credit
card balances and loans in an appropriate time frame. Keep this information in
mind as you strive to maintain or improve your credit score.